Facebook is only 5.5% of the Nasdaq Composite (COMP), but yesterday’s plunge [see: Facebook Flops] was a good reminder to update our outlook.

In our last update [see: Nov 6, 2017 Update] we identified 7619.37 as our next upside target.

At this point, it’s pushing into the top quadrant of the rising white channel where it will soon reach the top of the rising purple channel — currently at 7260.

It probably won’t stop there, though, as the 1.618 and the rising white channel intersect at 7619.37 at the end of the year. It’s too convenient a target to ignore. And, I fully expect it to reach it unless we get a nasty surprise on the geopolitical front.

As it happened, COMP’s tag of 7619 was delayed by the February correction. It topped out last week and has since retreated 352 points — about 4.5%.  Since COMP reached its important 1.618 Fibonacci extension and the top of a well-formed channel, it’s fair to ask whether there’s more downside ahead.

continued for members…Note that I adjusted the rising red channel to fit Jan’s highs and Feb’s lows.  It’s not as good a fit, IMO.  But, it seems to be the narrative that TPTB had in mind.

Note also the purple line running through the top of the chart.  This is the top of a channel dating back to COMP’s 2000 highs, formed by combining those highs with its 2002 and 2009 lows.

As we discussed in November, these large patterns are subject to placement error.  Fib levels are absolute.  But, a slight shift in channel placement can make a huge difference over the course of 18 years.

So, I went back and fine tuned the purple channel. Here’s the exact correct placement, based on the lows for Oct 10, 2002 and Mar 9, 2009 and the Mar 10, 2000 high.  If we zoom in on it, we can see that COMP broke slightly above the top between Jan 23-29, fell sharply once it was lost, tested it again on Feb 27, fell sharply again, then gapped back above it on Mar 9.  It fell back below it a third time yesterday.  Obviously, it’s important.This got me to thinking about the 2007 version of COMP’s top.  If we’re expecting SPX to peak on April 6, Day 39, what does that say about COMP?

In 2007, SPX peaked on Day 39.COMP made an interim high on Day 39, but managed a higher high three weeks later on Day 53.

One key difference back then versus now the SMA200.  COMP tested it in 2007, but hasn’t tagged it lately since Jul 2016.

The purple channel discussed above was a factor in 2007.  Note that the highs back then were pushing above the channel midline — seen below as a purple, dashed line.  In other words, it was a failed breakout.

Given that FB fell below its SMA200 today, I’m leaning toward the same thing happening again. The question is whether stocks, in general, have left the safety of our analog. Not every big drop in SPX involved a drop in FB.

But, nearly every big drop in FB was accompanied by a big drop in SPX. And, with a FOMC rate hike due out tomorrow and more on the way, the range of possible outcomes is broad — from new highs to the next lower Fib level at 6227.06.

Bottom line: the latest “breakout” of the purple channel got COMP up to important Fib resistance, but no higher.  Given that COMP has failed on three different attempts at the purple channel top, there’s a good chance it has run out of steam. If the red channel midline and yellow channel bottom don’t hold, the rapidly rising SMA200 (6712) might serve as an attractive downside target.

Those more recent channels do offer upside potential, particularly if FB is able to make a recovery.  Since it first started trading, FB has usually led COMP.  But, these past two days, it’s been a serious drag and a source of dangerous divergence.  The risk of a breakdown is very real.If FB can hold the top 23.6% of the channel it’s been in since late 2013, we could see a repeat of the Nov 2016-Jan 2017 pause for FB and spike through resistance for COMP.  If it doesn’t, then the dips of Aug 2015 and Jan 2016 are a stark reminder of the danger ahead.

GLTA.